WHAT?!? They…I mean…We have another retirement plan???

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Todd Cowman, Senior Consultant

2014 saw a large volume of merger and acquisition activity and 2015 is shaping up to be very similar. As a matter of fact, global M&A volume through December 31, 2014 was at its highest level since 20071. There’s a great amount of time and effort (and money) that goes into planning for one of these acquisitions but many fail to take the retirement plans into consideration, which can create added expense and significant liabilities to the acquiring organization.

Good news! Many of these risks can be avoided by proper planning which includes a thorough due diligence review and making sure the right questions are asked up front. One of the first and likely most critical questions that should be asked when involved in an acquisition is what is the type of acquisition? Is the transaction an asset purchase or stock sale AND what is the effective date of the transaction?

Asset purchase vs. Stock sale

In an asset purchase, the buyer is choosing which assets they wish to acquire which often includes the inventory and property, accounts receivable and other physical assets of the seller but it does not typically include any retirement plans previously maintained by the seller.

Alternatively, in a stock sale, the owner is selling up to 100% of their ownership interests in the business to the buyer, which automatically includes any retirement plan previously maintained by the seller. This could include a significantly underfunded pension plans or a 401(k) plan that has not been correctly administered. If the buyer does not want to take on liabilities for the seller’s retirement plans, steps must be taken prior to the close of the transaction to terminate the retirement plans. If not, the acquirer may be forced into maintaining the plans.

There are many reasons why a company may choose one type of acquisition over another but one of the biggest reasons may be potential liability. It’s often easier to structure the acquisition as an asset purchase as you understand what you’ve agreed to purchase and risks are limited.

How are employees impacted?

Employees who are affected by an asset purchase are generally terminated by their current employer and re-hired by the acquirer immediately following the close of the transaction. This allows those employees the option of receiving distributions from the seller’s plan and rolling into the new plan (if available) or receiving lump sum distributions, often fully vested in their account balances. This also means that outstanding loans become due and payable immediately which can create hardship for those employees.

There is generally little disruption for those employees that are impacted by a stock sale. In a stock sale, the employees are not allowed to receive distributions from the plan as the buyer is choosing to maintain the plan of the seller. Multiple plans will typically be maintained separately for a period of time and merged as of the following plan anniversary. As a result, there is no requirement to fully vest those employees and loans can continue to be repaid with little disruption.

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Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA.